Federal spending to hit 70-year low

The Harper government is set to squeeze the federal government’s role to the smallest it has been in seventy years. As shown in the fall Update of Economic and Fiscal Projections, federal government spending is projected to drop to a 14 per cent share of the economy by 2018-19—the lowest since at least 1948.

Fed Govt Share of Economy

Overall federal taxes and revenues are already at their lowest rate in 70 years. Total federal revenues as a share of the economy declined to 14 per cent in 2012-13, with tax revenues down to 11.5 per cent. They haven’t been this low since 1940. That’s before Canada had national public health insurance, the Canada Pension Plan or unemployment insurance. If revenues and spending associated with these are excluded, we have to go even further back to find a time where the relative role of the federal government in Canada was so small. And if the Harper government follows through with its plan to allow income splitting for tax purposes and to increase the annual limit for Tax-Free Savings Accounts, revenues will be even lower.

While the federal government’s tax revenues have declined as a share of the economy, many Canadians might not feel any better off, or more lightly taxed. That’s because there’s been a major shift in where the federal government gets its money.

Tax rates on top incomes and corporations have been cut, while the use of tax loopholes and tax havens has increased. The conversion of retail sales taxes to value-added taxes like the GST and HST has shifted the costs of these taxes onto consumers and away from businesses. And with increasing responsibilities being downloaded to provinces and municipalities, these levels of government have relied on increasing more regressive taxes. Our tax system has become so regressive that the top 1 per cent pays a lower overall rate of tax than the poorest 10 per cent.

The federal government’s revenues have increasingly shifted towards personal income tax (PIT). For the first time ever, personal income taxes are projected to provide more than 50 per cent of Ottawa’s revenues next year, and keep rising. That’s up from a 30 per cent share fifty years ago and even lower shares before then.

The share of the federal government’s revenues paid by corporations have come down, as have other taxes and duties, including estate taxes, excise taxes and custom duties. Despite record profits, corporations provide just 13.6 per cent of the federal government’s revenues in corporate income taxes. That’s a third less than the share they provided during the “Golden Age of Capitalism” from 1946 to 1970.

If the federal government’s revenues were returned to their post-war average of 16.8 per cent, it would have $48.7 billion more in revenues this year and $55.8 billion more in 2018. That kind of revenue would provide more than enough money to eliminate the deficit and fund important social programs. While some politicians and business lobby groups will always claim otherwise, it’s clear the federal government has a revenue problem—not a spending problem.

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